Freight payment vendor Trendset rocked by embezzlement case

Wednesday, April 03, 2013

The freight payment and audit services provider Trendset has alerted its clients to an internal fraud and embezzlement issue which could affect payments the provider was supposed to make on behalf of its shipper customers to their transportation carriers.
Trendset Chief Executive Officer Gary Selvaggio said in a letter to customers last week, which obtained by American Shipper, that a “trusted employee” engaged in a fraud and embezzled funds from the company’s bank accounts, accounts from which Trendset pays its customers’ freight invoices.
“The fraud was discovered through a review of suspect transactions first noted by our bank,” Selvaggio wrote. “Federal authorities, including the FBI, were alerted and a forensic review was conducted. The employee was indicted and plead guilty to certain charges.”
Selvaggio noted while the amount withdrawn from the company’s accounts “represents a tiny percentage of the volume of transactions which we process annually on behalf of our customers… the volume of transactions we handle is large. Consequently, the total amount of the deficiency is significant and is a sum larger than the company can pay from its current funds.”
Trendset executives have not responded to repeated requests for comment from American Shipper.
According to its Website, Trendset manages $10 billion worth in payments. It’s unknown what percentage of that has been affected by the fraud and embezzlement case.
Trendset, as of last week, stopped providing bill pay services, and contacted banks that can provide this service to handle the unpaid items in its system.
Selvaggio laid out a series of steps the company will take to pay back the affected sums, including offering free contract optimization services, as well as free overages, shortages and damages claims services to its customers. Trendset normally takes a fee for those services through a gain sharing arrangement.
Secondly, the company will attempt to pay back the deficiencies periodically. Selvaggio said Trendset has filed an insurance claim.
“If Trendset had the cash available to immediately pay off these deficiencies, the company would,” he wrote. “We hope that your free use of our freight management tools will significantly offset your deficiency. To the extent that there is still a deficiency, the only path to recovery is for Trendset to distribute its cash earnings to its affected customers over time.”
Selvaggio said he would take no salary until all customers were paid back in full.
The incident highlights the vulnerability of the freight payment industry in terms of a lack of regulatory control. The freight payment vendor landscape includes providers that are banks and those that are not, but the bank-based providers, such as U.S. Bank, Cass, and Citi, have regulatory responsibility that their non-bank competitors do not. As such, shippers seeking to outsource their freight payment activity are faced with a decision as to whether the banking aspect of their provider is important. What’s more, there are major differences between the multitude of non-bank providers, with some going the extra step to insure their customers’ managed funds 100 percent through the Federal Deposit Insurance Corp. (FDIC). As one provider put it to American Shipper, every vendor, bank-backed or not, has a legal mandate to protect the funds entrusted to it by a client.
According to the most recent American ShipperTransportation Payment Benchmark Study, half of respondents feel it’s moderately important to not important that their freight pay vendor is a bank. The other half consider it very or extremely important that their vendor is a bank. Of the first half, 22 percent said it’s not important at all that their vendor is a bank.
The Trendset incident echoes a recent case between Cardinal Health and its freight pay vendor nVision. Cardinal Health sued nVision in U.S. District Court for overcharging fees related to its freight invoice payment, with the two parties eventually agreeing to a confidential settlement. nVision is a non-bank vendor.
As one expert pointed out to American Shipper, often shippers only think of the fees they pay to a freight pay and audit vendor, rather than the total spend managed by that vendor. So a shipper that pays a vendor $50,000 to manage its $200 million in freight spend is best served considering the larger number, not the smaller number, as the money actually committed to its vendor.
Trendset is a mid-major player in the freight payment market, but counts among its customer list a large group of household shipper names, including Bausch and Lomb, Chrysler, GM, L’Oreal, Dick’s Sporting Goods, Jo-Ann Stores, Guitar Center, and Sur La Table, among others, according to a document obtained by American Shipper. It’s unknown how much freight spend each customer uses Trendset for. It’s common for shippers to use more than one system to handle different elements of its freight payment, including different systems for different product lines within the same company.
Some shippers handle freight payments in-house, wary of handing their checkbook to an outside vendor over which there is no perceived regulatory control. Others use the freight payment modules within their larger transportation management system (TMS) or enterprise resource planning (ERP) platforms.
Selvaggio admitted in his letter that proper internal controls were not in place to prevent such incidents from occurring.
“These accounts and transactions were not subjected to the rigorous financial controls which should have been in place,” he wrote. “We do not yet fully understand the specific cause(s) of this deficiency. The money may have been embezzled, some of it was; it is also possible that we made payments to freight carriers without collecting the corresponding funds from some customers. We may have made duplicate payments for legitimate and approved freight bills. We are still working to determine how long that these errors have occurred, but they may have gone undetected for several years.” - Eric Johnson